[i]. You are the owner of 100 bonds issued by Euler, Ltd.

[i]. You are the owner of 100 bonds issued by Euler, Ltd. These bonds have 8 years remaining to maturity, an annual coupon payment of $80, and a par value of $1,000. Unfortunately, Euler is on the brink of bankruptcy. The creditors, including yourself, have agreed to a postponement of the next 4 interest payments (otherwise, the next interest payment would have been due in 1 year). The remaining interest payments, for Years 5 through 8, will be made as scheduled. The postponed payments will accrue interest at an annual rate of 6 percent, and they will then be paid as a lump sum at maturity 8 years hence. The required rate of return on these bonds, considering their substantial risk, is now 28 percent. What is the present value of each bond?

 

  1. $538.21

 

  1. $426.73

 

  1. $384.84

 

  1. $266.88

 

  1. $249.98

 

 

[ii]. Marie Snell recently inherited some bonds (face value $100,000) from her father, and soon thereafter she became engaged to Sam Spade, a University of Florida marketing graduate. Sam wants Marie to cash in the bonds so the two of them can use the money to “live like royalty” for two years in Monte Carlo. The 2 percent annual coupon bonds mature on January 1, 2024, and it is now January 1, 2004. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent. If Marie sells her bonds now and puts the proceeds into an account which pays 10 percent compounded annually, what would be the largest equal annual amounts she could withdraw for two years, beginning today (i.e., two payments, the first payment today and the second payment one year from today)?

 

  1. $13,255

 

  1. $29,708

 

  1. $12,654

 

  1. $25,305

 

  1. $14,580

 

 

[iii]. Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest paid semiannually. The required nominal rate on this debt has now risen to 16 percent. What is the current value of this bond?

 

  1. $1,273

 

  1. $1,000

 

  1. $7,783

 

  1. $ 550

 

  1. $ 450

 

 

[iv]. JRJ Corporation recently issued 10-year bonds at a price of $1,000. These bonds pay $60 in interest each six months. Their price has remained stable since they were issued, i.e., they still sell for $1,000. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years, a par value of $1,000, and pay $40 in interest every six months. If both bonds have the same yield, how many new bonds must JRJ issue to raise $2,000,000 cash?

 

  1. 2,400

 

  1. 2,596

 

  1. 3,000

 

  1. 5,000

 

  1. 4,275

 

 

[v]. Assume that you are considering the purchase of a $1,000 par value bond that pays interest of $70 each six months and has 10 years to go before it matures. If you buy this bond, you expect to hold it for 5 years and then to sell it in the market. You (and other investors) currently require a nominal annual rate of 16 percent, but you expect the market to require a nominal rate of only 12 percent when you sell the bond due to a general decline in interest rates. How much should you be willing to pay for this bond?

 

  1. $ 842.00

 

  1. $1,115.81

 

  1. $1,359.26

 

  1. $ 966.99

 

  1. $ 731.85

 

 

 

 

 

 

 

 

 

[vi]. Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a nominal annual rate of return of 12 percent, with quarterly compounding, how much should you be willing to pay for this bond? (Hint: The PVIFA and PVIF for 3 percent, 60 periods are 27.6748 and 0.1697, respectively.)

 

  1. $ 821.92

 

  1. $1,207.57

 

  1. $ 986.43

 

  1. $1,120.71

 

  1. $1,358.24

 

 

 

[vii]. Your client has been offered a 5-year, $1,000 par value bond with a 10 percent coupon. Interest on this bond is paid quarterly. If your client is to earn a nominal rate of return of 12 percent, compounded quarterly, how much should she pay for the bond?

 

  1. $ 800

 

  1. $ 926

 

  1. $1,025

 

  1. $1,216

 

  1. $ 981

 

 

[viii]. In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation’s balance sheet as of today, January 1, 2004, is as follows:

 

Long-term debt (bonds, at par) $10,000,000

 

Preferred stock 2,000,000

 

Common stock ($10 par) 10,000,000

 

Retained earnings 4,000,000

 

Total debt and equity $26,000,000

 

The bonds have a 4 percent coupon rate, payable semiannually, and a par value of $1,000. They mature on January 1, 2014. The yield to maturity is 12 percent, so the bonds now sell below par. What is the current market value of the firm’s debt?

 

  1. $5,412,000

 

  1. $5,480,000

 

  1. $2,531,000

 

  1. $7,706,000

 

  1. $7,056,000

 

 

[ix]. You just purchased a 15-year bond with an 11 percent annual coupon. The bond has a face value of $1,000 and a current yield of 10 percent. Assuming that the yield to maturity of 9.7072 percent remains constant, what will be the price of the bond 1 year from now?

 

  1. $1,000

 

  1. $1,064

 

  1. $1,097

 

  1. $1,100

 

  1. $1,150

 

 

[x]. Cold Boxes Ltd. has 100 bonds outstanding (maturity value = $1,000). The nominal required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. What is the annual coupon interest rate?

 

  1. 8%

 

  1. 6%

 

  1. 4%

 

  1. 2%

 

  1. 0%

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